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This Is the Main Problem With DermTech's Q3 Results

By Keith Speights and Brian Orelli, PhD – Nov 20, 2021 at 7:01AM

Key Points

  • DermTech reported modest revenue growth in Q3.
  • The company lowered its full-year revenue guidance.
  • The key for DermTech's success is to convince dermatologists to change their practices.

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Nothing major changed for the skin genomics company in Q3.

DermTech (DMTK -1.64%) announced its third-quarter results on Nov. 9, 2021. In this Motley Fool Live video recorded on Nov. 10, 2021, Motley Fool contributors Keith Speights and Brian Orelli discuss the main problem with the company's Q3 update.

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Keith Speights: Brian, we're going to switch gears totally here, away from COVID-19 altogether. A couple of weeks ago, you mentioned DermTech as a stock that you were especially going to watch this earnings season. Well, yesterday, the company reported its Q3 results.

What was your take on DermTech's update? Were there any surprises there?

Brian Orelli: There weren't any surprises and I guess that was the problem. It was more of the same from the company.

This company is developing tests for skin cancer. Test volumes were flat quarter over quarter. Revenue from the tests increased two percent sequentially, we saw quarter-over-quarter to three million dollars.

It's getting more tests paid for, which is good. But it's only a small growth and the revenue from tests and they didn't actually perform anymore tests than they did in the quarter before it.

Guidance for the test revenue for the company was revised down to between $10.5 million and $12 million. They were previously looking for $11.5 million to $13.5 million. They're one million down on the bottom end and a million and a half down on the top end.

If you subtract out the eight million that they've already done for the first nine months, that means for fourth quarter, they're looking at 2.5-4 million. Four million would be great. That would be a 33 percent sequential growth, but 2.5 million would be a decline quarter-over-quarter. It's definitely headed in the wrong direction.

I saw last night when I was looking at the results it was down quite a bit in the aftermarket trading, but I just looked right now and it's up one percent after opening pretty far down. I don't think [laughs] investors are having trouble valuing the company and knowing where it's going to go from here.

Keith Speights: You're still a shareholder, right?

Brian Orelli: Yes.

Keith Speights: Yeah. I am too. For other shareholders out there of DermTech, Brian, what do you think it's going to take to really ignite their stock?

Brian Orelli: We've got to get dermatologists to change their practice. It's not an easy thing. But I think that it will come in waves. As doctors try it and get used to it and then realize how much better it is for the patient then I think they'll become believers.

I think DermTech has said that one way that happens is the doctors look at things and because they're not doing biopsies, they'll basically test everything. They'll look at something and say like, I probably wouldn't biopsy this, but I'm going to go out and test it.

Then if that thing is positive, that's when they really become a believer because now they realized that the test is more powerful than their eyes. Things that they wouldn't necessarily biopsy because they think it's unlikely that it's melanoma. When it turns out that it is, then they become believers.

Keith Speights: Another thing that I'm watching, and I wish I had been able to listen to their Q3 call and I was unable to do so. But the company is far along in testing its Luminate product that's a genomics test designed to assess UV damage and skin cancer risk.

Once DermTech comes out with that product I think that gives them another growth driver and it could be a really big growth driver. I think the potential market there is even bigger than its melanoma test. That's another big thing to watch with DermTech.

Brian Orelli: Yeah. But of course, they've still got to convince doctors to change their practice.

Keith Speights: Yeah. There's still that core issue.

Brian Orelli: Then I guess the third thing would be that they need to get more tests covered by private insurers. They're covered by Medicare, which covers quite a bit of potential melanoma patients.

Melanoma patients tend to be older, but getting covered by more insurance companies would also be helpful because doctors don't want to have to go through and look and see whether is this patient is going to be covered by this thing. That lowers their desire to actually start testing it because if it's not, the likelihood of it being covered is low than in the area that they are working in compared to what insurances does people have, and then they're probably not going to be likely to start trying it out.

Keith Speights owns shares of DermTech, Inc. The Motley Fool owns shares of and recommends DermTech, Inc. The Motley Fool has a disclosure policy.

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